In the interests of our politicians making responsible economic decisions I have always been keen for the Scottish Parliament to be more accountable for the spending it sanctions. Three components of being more accountable are, firstly, it raises the majority of what it spends; secondly, it recognises raising taxes depresses economic activity and can reduce revenues rather than increase them – while a marginal cut can grow the tax revenues; and thirdly, it takes account of tax rates in neighbouring jurisdictions.
The sad truth is that while Holyrood has been made more responsible for raising the finance required for its spending, the collectivist outlook of its politicians has blinded them to how high taxes can reduce revenues – while the tax competition has to date been relatively modest and thus generally ignored. This has meant the SNP – the party in power for the last 15 years given the greater control of the economic levers it requested – nurtured a black hole in Scotland’s public finances of £3.5 billion.
The Scottish Government’s own Fiscal Commission has reported consistently that tax revenues from a variety of sources SNP ministers control have fallen well short of budgeted expectations. As John McLaren explained eloquently here last week the relative silence of the opposition is inexplicable, it’s as if they don’t want the job of sorting out the SNP’s mess because it means telling the Scottish people unpalatable truths.
When you have a unicameral parliament with no second chamber to check against and raise awareness about the follies of the senior chamber, serious and expensive mistakes are likely to happen. One corrective on bad tax policy is to have neighbouring tax jurisdictions, like England, with lower tax rates so taxpayers can see that it is possible to be better off by relocating. Such an outcome is now developing.
Over 16 per cent of Scottish income tax revenue is paid by just 15,000 additional rate taxpayers, who – if Nicola Sturgeon and her fellow ministers choose to not pass on Kwarteng’s tax cuts – face having to hand over considerably more tax if they choose to retain Scottish tax residency. The option of a McBrain Drain to England is about to become very tempting.
Living in Berwick-upon-Tweed and working at home with only the occasional 45-minute commute to Edinburgh is suddenly a far more attractive proposition. If only 1,000 top rate taxpayers were to relocate Scotland would lose 1 per cent of its tax base, worth £120 million on income tax p/a – before factoring in the lost dividends and savings revenues, as well as taxed economic activity through VAT and Land & Building Transaction Tax.
Collectivist cheerleaders of higher taxes like to present top rate taxpayers as the super-rich, but tax thresholds snare many public servants such as GPs, experienced teachers and professionals often trained at our universities only for them to follow the money to more rewarding climes. Scotland has a shortage of consultants and GPs yet many young Scots who go into medicine immediately leave the country, and financial reward is a large part of the reason – now it is going to become an imperative.
The problem with Scottish nationalism that has grown out of a belief Scots are inherently more socialist and Scotland should be more collectivist than England is they never take account of what would happen if England were to choose to be more competitively capitalist. Scotland’s public finances – including all the free stuff – have been underwritten by English taxpayers in all but two years of the last 23.
Under devolution, the only way Scotland’s economic growth can outpace that of the rest of the UK is to make our tax rates far more competitive – that means lower.
Then we will see people, including many Scots, relocating to work and pay their taxes in Scotland, and our tax revenues rising.
Under so-called independence, the economic problem would become far greater. Shorn of the annual fiscal transfer of £10-15bn passed to Scotland the rest of the UK could cut its taxes yet more and become even more attractive to Scotland’s best talent.
Are tax cuts for every UK taxpayer a gamble? Well, it’s surely less of a gamble than raising taxes that will depress economic activity and employment in the middle of a recession.
Were Kwarteng’s tax cuts a shock, or even a surprise? The cancellation of the increase in National Insurance contributions and the Corporation Tax rate was signalled during Liz Truss’s leadership election campaign. That’s not a cut, that’s keeping the status quo – so, to deliver tax cuts required Kwarteng to go further and he has delivered; bringing forward the introduction of the 19p income tax rate to next year and abolishing the additional rate of 45p are were implicitly signalled.
Even the abolition of the EU’s bankers’ bonus cap was signalled well in advance – a policy that delivered the perverse incentive of increasing bankers’ salaries in place of bonuses. A policy that discouraged international banks from locating staff in the UK (and EU) because it removed incentives and drove up employers’ fixed costs.
Now the UK should see a more dynamic international banking sector and greater tax revenues to fund the ever-growing costs of public services like the NHS. Surely that’s a good thing?
The only shock or surprise is that we have, for once, a Prime Minister who is doing what it says on her tin.
If Scotland is to avoid the McBrain Drain and see its black hole become larger our politicians have to at least match UK tax rates – and preferably undercut them.
Brian Monteith is a former member of the Scottish and European Parliaments and is editor of ThinkScotland.org
Subscribe at www.scotsman.com/subscriptions